Regulator to adopt new benchmark lending rate

Korea's financial regulator announced a plan on Wednesday to introduce a new benchmark money market rate, in a bid to meet growing calls for a new short-term rating rate after a possible rigging of the certificate of deposit (CD) rate, the current benchmark rate, by banks and brokerage firms.

The Financial Services Commission (FSC) said it will develop the new benchmark lending rate, dubbed as the Cost of Funding Index (COFIX), to be quoted every week based on the average rate submitted by nine local banks.

The new week-based COFIX will first be released in the first week of November by the Korea Federation of Banks after a two-month preparation period, the FSC said.

The new reference market rate is expected to provide the benchmark for various types of loans, including corporate and credit that have a relatively shorter maturity, it added.

The existing COFIX is roughly the nine banks' average funding cost of debts, whose maturities range from nine to 10 months, it said.

The regulator said other details will be determined after further discussions.

The COFIX has been considered by local policy makers an alternative to the CD rate since the Fair Trade Commission (FTC) last month launched a probe into a possible rigging of the CD rate by market players.

On July 17, the FTC began investigating banks and securities firms over whether they colluded to quote the CD rate artificially higher for more profit, following a similar manipulation case of the London Interbank Offered Rate (LIBOR) in the United States and Britain.

Since then, there has been a growing call pressuring the authorities to fix the benchmark rate-setting system.

The FSC said it would gradually induce market players to shift to the COFIX for its reference rate, but the CD rate will be held valid for the time being since a bulk of financial products in South Korea, including mortgage loans and interest swaps, are tied to it.

The central bank's data show that loans linked to CD rates account for 30 percent of the overall loans extended by banks as of end-March, worth 323.8 trillion won. A total of 154.3 trillion won, or 14.3 percent worth of debts are tied to the COFIX. (Yonhap)